The Hindu Business Line : Changes in BPLR system on the cards

Over time, the system of BPLR has lost its relevance as a meaningful reference rate as majority of loans sanctioned by banks are at rates below the BPLR.

Our Bureau

Mumbai, April 21 The Reserve Bank of India has decided to constitute a Working Group to review the present benchmark prime lending rate (BPLR) system and suggest changes to make credit pricing more transparent. The Working Group would consult all the stakeholders and submit its report by end-August 2009, the RBI said in its Annual Policy Statement 2009-10.

Explaining the rationale behind the move, the RBI said that over time, the system of BPLR has lost its relevance as a meaningful reference rate as majority of loans sanctioned by banks are at rates below the BPLR.

“This impedes the smooth transmission of monetary signals and makes the loan pricing system non-transparent. It has, therefore, become necessary to review the current procedures and processes of pricing of credit,” said the RBI.

Changes in BPLR do not fully reflect the changes in the effective lending rates. During the pre-Policy consultations with the Reserve Bank, banks pointed out that lending rates should not be assessed only in terms of reduction in BPLRs since as much as three-quarter of lending is at rates below BPLR, which includes lending to agriculture, export sector and well-rated companies, including public sector undertakings, said the RBI policy statement.

Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said that currently, even if interest rates are reduced, it is not perceived to be reduced because of the opaqueness of the BPLR system. It is a structural issue. Factors like sub-BPLR lending, the fact that it is open to negotiation and the lack of floating rates for deposit rates need to be addressed, he said.

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